When Is It Acceptable To Profit From Death?

The target audience for brochures like that of ING's are people nearing retirement with a nest egg to safeguard and perhaps grow a bit. It's a huge and growing market. In 2011, as the first wave of baby boomers began to retire, there were more than 40 million people age 65 or over. Between 2001 and 2010, life insurance companies sold about $1.4 trillion worth of variable annuities, according to LIMRA, an industry association.

Caramadre got the seeds of his idea in the mid-90s when he attended an investment seminar for insurance agents. He quickly saw how variable annuities could be a hot product for insurance companies — particularly when they could charge hefty fees for attractive goodies like the guaranteed death benefit.

Caramadre decided that he wouldn't offer variable annuities to clients in the way the insurance companies envisioned. It was too expensive. "They are just whacking you for fees," he says.

What Caramadre wanted was a way to get his clients the benefits without their having to die.

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Society has long frowned on certain behaviors. Taking out an insurance policy on a friend or neighbor and killing them? Not acceptable. Taking out a life insurance policy that gambles your neighbor will die soon, even without your help, also crosses the line. Today, it is well-established law that one must have what is called an "insurable interest" before purchasing an insurance policy on someone else's life. The person who benefits from the policy must be a relative or business associate who himself would face financial or familial loss from the death.

Insurable interest worked fine for 200 years or so until the life insurance business itself changed. Despite its name, the industry doesn't sell as much "life insurance" anymore. Life companies now peddle financial services, particularly annuities. Variable annuities were developed in the 1950s, initially as a way to give teachers retirement options. Insurable interest was not an issue and could have been an impediment to widespread adoption of the product.

Caramadre did his research and concluded that Rhode Island law did not require that people buying variable annuities have an insurable interest.

As imagined by the insurance companies, variable annuities have two participants. There's the investor, the person who puts up the money. That person typically also serves as the annuitant, or the "measuring life." If that person dies, the death benefit is paid to the beneficiary, usually a spouse or child.

Caramadre realized it didn't have to be that way. There was no requirement that the investor and the annuitant be the same person. In fact, as he read the contracts, the annuitant didn't need to have a relationship with the investor at all. Caramadre or one of his clients could buy an annuity on the life of someone who was not expected to live long and then pocket any profit when that person died.

"All we need to do is replace the necessity of the investor having to die, with someone else, dying," says Caramadre.

If they chose well, the account went up and they reaped the benefits. If they chose poorly, the death benefit kicked in and they recouped their original investment.

"If you won, you keep the winnings. If you lose, they give you your money back," says Caramadre.

There is something morally unsettling about this. Put simply: Caramadre was setting himself and his clients up to profit from the demise of strangers. While the macabre aspect of his scheme offends many, it did not make Caramadre squeamish. He rationalized that a lot of people — funeral homes, hospitals and cemeteries — make money from the dead and dying, why not him?

Caramadre's insight might have remained a curiosity were it not for something called "the arms race." As competition intensified in the mid-2000s, many life insurance companies launched an unprecedented war for customers, offering benefits they now acknowledge were far, far too favorable.

The insurance companies' contracts provided little defense against Caramadre's approach. For policies under a million dollars, they didn't check the health status of people receiving variable annuities. Instead, they limited the ages of annuitants or the amount that could be invested. All that the companies required for persons to serve as a measuring life was their signature, birthdate and Social Security number. Some didn't even require the signature.

There was usually only a single line that touched on insurable interest in the contract. Companies would ask if a relationship existed between the investor and the annuitant. Caramadre and the men with whom he worked would either leave the answer blank or type in "none." The companies, eager for business, took the policy anyway.

There have been at least eight lawsuits filed in Rhode Island's federal district court relating to Caramadre's scheme. Insurance companies Nationwide, Transamerica and Western Reserve have all sued. The companies have not fared well in civil court. United States District Court Judge William Smith keeps knocking out claims. The companies then re-file new ones. As of this writing, Western Reserve has filed five successive complaints against Caramadre in the same case. When he dismissed Nationwide's complaint, Judge Smith questioned whether the company ignored its own contracts. In the Western Reserve case, Judge Smith wrote, "It is a bit ironic for Plaintiffs [the insurance companies] to suggest that they did not know the true nature of contracts that they themselves drafted."

The lawyer who represents both Transamerica and Western Reserve declined to comment.

The more serious charges are the criminal ones. Caramadre usually paid dying people between $3,000 and $10,000 for agreeing to serve as annuitants. He characterizes the arrangement as a win-win for everybody but the insurance companies. Prosecutors charge that he instructed participants in the scheme to lie, to steal identity information and to forge the signatures of annuitants in an effort to defraud insurance and bond companies.

The story as told by prosecutors goes like this: In an effort to get rich, Caramadre and his associates enticed the dying to give up their vital information by offering them $2,000 as a charitable donation. More than 150 people received the $2,000. Of those, at least 44 went on to play a role in number 18.

The government alleges that Caramadre directed his associates to lie to both the annuitants and the insurance companies. Sometimes, prosecutors assert, the dying people had no idea someone else stood to profit. In other instances, the indictment says, dying people were told that their signatures were just for the receipt of the charitable donation. A Caramadre employee allegedly told other family members they would be the beneficiaries. In five cases, the government says, signatures were forged.

Caramadre denies the accusations. He says that he instructed his employees to properly explain the program to the annuitants and that he would never permit forgeries.

Youthful looking with a round expressive face etched with deep lines across his brow, Caramadre appears more like an eager-to-please bulldog than a criminal mastermind. During the arms race, he says, companies did not complain when Caramadre paid their hefty fees and later filed claims seeking death benefits. Family members didn't object either. Everything changed in 2009 with the financial crisis. Companies started to feel the consequences of the arms race, the insurance companies sued and the FBI began visiting relatives and surviving annuitants. Today, some of those family members are the strongest witnesses for the prosecution.

"I lose my mom, who is my best friend, my world, and in me, losing my mother forever at the age of 64, you, in turn, profit and get X amount of dollars," says Stephanie Porter, whose mother received $2,000 from Caramadre before she died of cancer. "It's slimy what the man did."

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Caramadre learned to hustle early. He graduated from the University of Rhode Island in three years with an accounting and finance degree, supporting himself through odd jobs that included running his church's weekly bingo game. After graduation, he took a job at a bank preparing documents for trusts. A friend convinced him that his fastest track to becoming a millionaire would be to sell life insurance, so he took a job as an agent with the Penn Mutual Life Insurance Company.